Is Employee Retention Tax Credit Retroactive?

Companies can no longer pay salaries to apply for the Employee Retention Tax Credit, but they have until 2024 and, in some cases, 2025, to analyze their payrolls during the pandemic and apply for the credit retroactively by filing an amended tax return. Employers can file Form 941-X up to three years after the original payroll tax due date, which is normally April 15. Instead of being limited to companies with fewer than 100 employees, companies with up to 500 employees became eligible for the credit. It's important to note that salaries paid to certain related parties, even in the case of corporate entities, may not qualify for credit. The Employee Retention Credit (ERC) under the CARES Act encourages companies to keep employees on their payroll.

An eligible employer generally makes this choice by not asking the ERC for those qualifying wages on their federal employment tax return. Another major change was the ability of employers with 500 or fewer employees to attribute credit to all employees and not just to salaries paid to employees who didn't work. The amendment allowed the ERC to collect salaries that met the requirements that were paid, but that were not used to request the forgiveness of tax-free loans under the Paycheck Protection Program (PPP) loan program. This credit was designed to encourage these employers to keep employees on the payroll in circumstances where, otherwise, the employer would suspend the services of unpaid employees.

Generally, the beneficiary of a PPP loan can now apply for the ERC for the qualified salaries paid to their employees, but the salaries for which the employer applies to the ERC must then be excluded from the payroll costs that qualify for PPP loan forgiveness. Office of the Ogletree Deakins Law Firm, where he is a member of the employee benefits and executive compensation practice group and president of the Payroll Tax and Supplemental Benefits subgroup. A second favorable change for taxpayers was the ability of employers to apply for credit for group health plan expenses, even in cases where these were the only salaries paid to employees. Employers can still apply for the Employee Retention Tax Credit (ERTC) retroactively by filing Form 941-X, Employer Adjusted Federal Tax Return or Request for Refund, for each quarter in which they have paid qualifying wages.

Not only is the ERTC subject to taxes, but beneficiaries have to pay taxes on the ERTC money before they know if they have received it. An employer with qualifying expenses that did not originally apply for the ERC should consider filing Form 941-X to apply for the credit. One of the main changes of the Consolidated Appropriations Act (CAA) was to increase the percentage of credit from 50% of qualifying salaries to 70% of qualifying salaries. Qualifying wages include wage amounts paid by a qualifying employer to its employees plus allocable health plan expenses.